Project A:
Initial cost = 500,000
Salvage value at the end of the year 20: 500,000 – (20*1000)
= 500,000 – 20,000
= 480,000
Net Revenue: 70,00
Interest: 6%
Time Period: 20 years
Computation of NPV and annualized worth
Year | cash flow | Present value factor | Present value of cash flow | |||||
0 | -500000 | 1 | -500000 | |||||
1 to 20 | 7000 | 11.47 | 80290 | |||||
20 | 480000 | 0.312 | 149760 | |||||
Net Present Value | 269950 | |||||||
Present value annuity factor | 11.47 | |||||||
Annualised worth | 23535.31 |
Therefore,, the annualised worth of project A is 23535.31.
Project B:
Initial cost = 200,000
Salvage value at the end of the year 10: 0
Net Revenue: 630000
Interest: 6%
Time Period: 10 years
Computation of NPV and annualized worth
Year | cash flow | Present value factor | Present value of cash flow | |||||
0 | -200000 | 1 | -200000 | |||||
1 to 10 | 630000 | 7.36 | 46,36,800 | |||||
10 | 0 | 0 | 0 | |||||
Net Present Value | 4436800 | |||||||
Present value annuity factor | 7.36 | |||||||
Annualised worth | 602826.1 |
Therefore the annualised worth of project b is 602826.1.
By comparing the annualised worth of project A and B, we find that the Project B is better than Project A. Hence, project B should be choosen.
E accepted Two projects with different planning horizons are difficult to compare. On technique i...